To understand how operations worked in a legacy system, consider a basic procurement process between a supplier and a buyer. Suppose a company orders raw materials from a supplier. The supplier creates an invoice, which might be in paper format or in a digital format that the buyer’s system cannot read. Since the buyer’s procurement system cannot automatically process this invoice, an employee must manually enter the details into the company’s system. Once the materials arrive, the receiving department needs to record the delivery and verify that the correct quantity was received. However, since the receiving department has its own separate system, it must generate a goods receipt document and send it to the accounts payable department for payment processing. Again, because accounts payable uses a different system, the data must be entered manually once more before the payment can be approved.

This fragmented approach leads to several key challenges:

1. Manual Data Entry Errors – Every time information is re-entered manually, there is a risk of mistyping prices, quantities, or supplier details, leading to incorrect payments or mismatched records.
2. Delays in Processing – Since information does not flow automatically between departments, invoices, receipts, and payments take longer to be processed, causing delays in financial settlements and supplier relationships.
3. Duplicate and Conflicting Records – Without a centralized database, different departments may have inconsistent data, making it difficult to track inventory levels, financial commitments, and supplier transactions accurately.
4. Lack of Real-Time Visibility – Managers and decision-makers cannot access up-to-date information because records exist in separate systems. For example, procurement might place an order, but finance might not immediately see the expense, leading to budgeting issues.
5. Higher Costs and Inefficiencies – Maintaining multiple systems for different functions requires more IT resources, more employees for data entry, and more time spent reconciling errors, increasing overall business costs.

To solve these problems, businesses implement Enterprise Resource Planning (ERP) systems, which replace multiple standalone systems with a single integrated platform. ERP ensures that all departments use the same data, eliminating the need for manual entry and allowing real-time information sharing across the organization. For example, in an ERP system, when a supplier sends an invoice, it can be automatically matched with the purchase order and goods receipt, enabling instant approval for payment without re-entering data. Similarly, when inventory is updated in the warehouse, procurement and finance can see the changes immediately, improving coordination and decision-making.

By eliminating the inefficiencies of legacy systems, ERP allows companies to streamline operations, reduce costs, and improve accuracy, making supply chain processes far more efficient and reliable.

One of the key features of Enterprise Resource Planning (ERP) systems is that they are built in separate functional units called modules. Instead of having a single massive program handling everything, an ERP system consists of individual modules, each designed for a specific business function. For example, there are modules for finance, human resources, supply chain management, customer relationship management, and production planning. These modules work independently but are also connected, meaning that data flows smoothly across departments. This allows companies to integrate different business functions into a single system without needing multiple disconnected software solutions.

A major advantage of this modular structure is that companies can start small and expand gradually. Businesses do not have to install the entire ERP system at once; they can implement only the modules they need and add more as they grow. For instance, a small business might begin with just an accounting module to manage finances and later add an inventory management module when they expand operations. Similarly, a retail company might first adopt a sales and customer management module and later include a warehouse management module to track inventory in real time. This step-by-step approach makes ERP systems more flexible and cost-effective, allowing businesses to invest in technology based on their immediate needs while keeping future expansion in mind. 

Firms face choices in how they assemble their ERP systems. They can opt for an all-in-one solution from a single vendor, which offers the convenience of a unified system with seamless integration across all modules. Alternatively, companies can select a best-of-breed approach, choosing specific modules from specialized providers that offer advanced functionality in particular areas. For example, a distribution company might purchase most of its ERP modules from one vendor but opt for a warehousing and distribution module from a different provider that offers superior features for inventory management and logistics. This approach allows the company to leverage specialized capabilities that are crucial for its core operations.